The authors explore the twin hypotheses (1) that high-performance incentives, worker ownership of assets, and worker freedom from direct controls are complementary instruments for motivating workers, and (2) that such instruments can be expected to covary positively in cross-sectional data. They also relate their conclusions to empirical evidence, particularly that on the organization, compensation, and management of sales forces.

It is now widely accepted that rent-seeking (Anne Krueger, 1974) or directly unproductive profit seeking (Jagdish Bhagwati, 1982) may cause inefficiencies in the context of public sector decisions. The possibility that government decisions (for example, about taxes, quotas, franchises, or standards) may create or redistribute rents induces private parties to spend valuable resources to influence that distribution, even when such expenditures carry no social benefit. Moreover, the social cost of rent seeking can exceed the value of the resources spent trying to gain and protect rents, for example, because the fear of losing wealth through redistribution reduces the incentives for wealth creation. Treating rent-seeking activities as characteristic of public sector decision processes ignores the fact that similar phenomena are to be found in firms, unions, and other private sector organizations. Our recent work (Milgrom, 1988; our 1988, 1990 papers) attempts to identify the advantages of decision processes (private or public) that permit rent seeking, and to incorporate these into a cost-benefit analysis of optimal decision processes. Our work begins with an analysis of why rents and quasi rents arise in organizations and of the forms that the rent seeking they engender may take. Some measures to insulate the decision process from rent seeking, such as limits on the provision of by interested parties or restrictions on the range of options considered, may degrade the quality of decisions, especially by blocking the flow of valuable information. Optimal decision processes balance the costs of rent seeking against the value of obtained. Several aspects of the rules affect the opportunities that members have to spend resources trying to alter the distribution of rents. To ascertain the possibilities for rent seeking, the analyst must ask questions like: Can the parties propose new initiatives at any time? Can they give volumes of testimony in a form of their own choosing? Can they appeal adverse decisions? Are decision makers obliged to respond to the parties' initiatives? Is the range of actions that they can take in response relatively broad, rather than being tightly constrained by property rights or other formal rules? More affirmative answers to these questions lead to opportunities or greater incentives for costly rent seeking. As a kind of shorthand, we call decision processes that have of these elements more processes. The very elements that make a process open to rent seeking may also add flexibility and responsiveness, helping to ensure that important ideas and proposals are fully considered. From this perspective, the benefits of openness can (in principle) be measured by a value of information calculation, in the usual manner of statistical decision theory. Weighing the costs and benefits, it follows that a open process is desirable when the rents available for redistribution are low, and the value of the that might be acquired is high. Conversely, when the potential for redistribution is high and the value of is low, the optimal decision process is less open. This kind of reasoning helps to illuminate the variations in the decision processes that are found in many organizations. We have discussed a number of examples in our earlier work, including the characteristics of personnel departments, the contrasting patterns of decision making, employment and compensation in U.S. and Japanese firms, *Professor of Economics, Stanford University, and Jonathan B. Lovelace Professor of Economics, Graduate School of Business, Stanford University, Stanford, CA 94305, respectively. This work was supported by the National Science Foundation.

The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.

The theories of supermodular optimization and games provide a framework for the analysis of systems marked by complementarity. We summarize the principal results of these theories and indicate their usefulness by applying them to study the shift to ‘modern manufacturing’. We also use them to analyze the characteristic features of the Lincoln Electric Company's strategy and structure.

A systematic treatment of the economics of the modern firm, this book draws on the insights of a variety of areas in modern economics and other disciplines, but presents a coherent, consistent, innovative treatment of the central problems in organizations of motivating people and coordinating their activities.

The standard envelope theorems apply to choice sets with convex and topological structure, providing sufficient conditions for the value function to be differentiable in a parameter and characterizing its derivative.This paper studies optimization with arbitrary choice sets and shows that the traditional envelope formula holds at any differentiability point of the value function.We also provide conditions for the value function to be, variously, absolutely continuous, left-and right-differentiable, or fully differentiable.These results are applied to mechanism design, convex programming, continuous optimization problems, saddle-point problems, problems with parameterized constraints, and optimal stopping problems.

The authors derive a necessary and sufficient condition for the solution set of an optimization problem to be monotonic in the parameters of the problem. In addition, they develop practical methods for checking the condition and demonstrate its applications to the classical theories of the competitive firm, the monopolist, the Bertrand oligopolist, consumer and growth theory, game theory, and general equilibrium analysis.

The authors study a rich class of noncooperative games that includes models of oligopoly competition, macroeconomic coordination failures, arms races, bank runs, technology adoption and diffusion, R&D competition, pretrial bargaining, coordination in teams, and many others. For all these games, the sets of pure strategy Nash equilibria, correlated equilibria, and rationalizable strategies have identical bounds. Also, for a class of models of dynamic adaptive choice behavior that encompasses both best-response dynamics and Bayesian learning, the players' choices lie eventually within the same bounds. These bounds are shown to vary monotonically with certain exogenous parameters.

Limit pricing involves charging prices below the monopoly price to make new entry appear unattractive.If the entrant is a rational decision maker with complete information, pre-entry prices will not influence its entry decision, so the established firm has no incentive to practice limit pricing.However, if the established firm has private, payoff relevant information (e.g., about costs), then prices can signal that information, so limit pricing can arise in equilibrium.The probability that entry actually occurs in such an equilibrium, however, can be lower, the same, or even higher than in a regime of complete information (where no limit pricing would occur).'Much of the work reported here first appeared in [11].This work has been presented at a large number of conferences, meetings, and seminars, and we would like to thank our audiences at each of these events for their comments.We are particularly indebted to Eric Maskin, Roger Myerson, Steve Salop, Robert Wilson, and two referees for their helpful suggestions, to David Besanko for his excellent research assistance,

One of the most active and exciting areas of economic research over the last several years has been the use of noncooperative games of incomplete information to model industrial competition. This work has yielded not only a remarkable number of papers but also several new insights on and explanations of fundamentally important issues. The purpose of this paper is to attempt an appreciation and evaluation of this work. Because most of our individual and joint work since about 1979 has been in this mode, it will come as no surprise that we are proponents of this line of research. However, there are several questions and potential problems that we see as arising in connection with this methodology, and we will attempt to address these. First, a disclaimer. We are not attempting a survey of the applications of asymmetric information games (AIG) to industrial organization, although we will refer in a highly selective fashion to a number of prominent strands in this literature. (In particular, where any references are provided at all, they are typically only to the earliest contributions to a subject.) Even more, we do not deal with work in which informational asymmetries are important but the analysis is not game theoretic (for example, search and price dispersion, or the early work on the lemons problem and on moral hazard and adverse selection in insurance markets) or with game-theoretic treatments that assume complete information. I. AIG Methods and Applications